In a videoconference address to Northwestern University School of Law’s annual Securities Regulation Institute, SEC Chairman Jay Clayton spoke about his expectations for market professionals, particularly their role in new products, and his plans for the remaining Dodd-Frank mandates. In light of certain gatekeepers’ actions in the initial coin offering area, his message to market professionals is to act responsibly and hold themselves to high standards. With respect to the Dodd-Frank mandates, Clayton said it is the SEC’s obligation to complete those rules and he intends to do so.
Market professionals and ICOs. It is incumbent upon securities lawyers, accountants, underwriters and dealers to bring their expertise, judgment, and professional skepticism to their work, Clayton advised. He said the legal working surrounding some of the initial coin offerings that he has seen illustrate his point. For example, in some instances the lawyers appear to be assisting promoters in structuring offerings of products that have many of the key features of a securities offering, but then claim the products are not securities. The promoters then proceed with the offering without complying with the securities laws, which deprives investors of the protections intended by those laws.
Clayton also referred to lawyers who provide what he called "it depends" equivocal advice as to whether a "coin" is a security or whether the offering would qualify for an exemption from registration. The clients proceed with the offering because they are willing to take the risk. Clayton said the staff is on high alert for initial coin offerings that violate the spirit of the securities laws and the professional obligations of the securities bar.
Some ICOs proceed without the involvement of a market professional, Clayton added, so the SEC is trying to educate the public about the risks of unregistered offerings by unregistered promoters which lack the advice of securities lawyers or accountants.
Blockchain technology. On the separate and narrower issue of blockchain technology, Clayton said the SEC is looking closely at the disclosures of public companies that shift their business models to capitalize on the perceived promise of distributed ledger technology. In the case of an offering, he said the staff will focus on the disclosure and its compliance with the securities laws.
Dodd-Frank mandates. The remaining Dodd-Frank mandates fall into four areas—the security-based swap regime; executive compensation; specialized disclosure rules; and market developments. Clayton said the completion of the Title VII rules should be adopted as a package since they are substantially interrelated. He also noted that in some instances the SEC’s final and proposed rules differ significantly from those adopted by the CFTC under its Title VII mandates. To the extent possible, he said the SEC will seek to harmonize its rules with the CFTC’s to reduce complexity and costs, and a constructive engagement is underway with CFTC personnel in that regard.
Executive compensation. The executive compensation rules are challenging given the different constituencies’ views of their goals, according to Clayton. He believes a serial approach is the most efficient and is discussing with his fellow commissioners and staff how to proceed.
Specialized disclosure rules. The specialized disclosure rules, such as resource extraction, also pose unique challenges and must be drafted in a way that meets the SEC’s obligations under the Administrative Procedure Act while also surviving legal challenges. He added that some will challenge the product regardless of its outcome, but that does not relieve the SEC of its responsibility. He has directed the staff to draft rules that meet the objectives of Congress, take into account the procedural and other constraints, and bring finality to these matters.
The last category overlaps the others to some extent. In some instances, market developments, including shareholder engagement, have partly addressed the concerns that motivated the statutory requirements. For example, Clayton mentioned companies that have begun to disclose their clawback policies, some of which go beyond the Dodd-Frank mandate. He said the SEC’s work should reflect these market developments.
Clayton closed by again emphasizing the importance of legal advice and other professional services to the market, and assuring that the SEC is actively addressing the remaining Dodd-Frank mandates.
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